Wisdom of Jesse Livermore

Legendary speculator Jesse Livermore is surely one of the most fascinating characters
in all of financial-market history.

About a century ago Jesse Livermore blossomed into one of the most celebrated
speculators of all time. He was trading heavily in the early decades of the
1900s, a wondrous era to speculate in stocks. His renowned exploits are still
viewed with great awe and reverence by today's elite speculators and his towering
speculation wisdom will stand tall for ages to come.

Mr. Livermore's illustrious career began as a young lad when he landed a job
as a quotation-board boy in a stock-brokerage office. As he transferred stock-price
numbers from the ticker tape and posted them on the big board for the brokerage's
customers to see, he became captivated by the endless stream of figures.

After a while he began to make observations, noting that when the price of
a stock behaved a certain way a substantial drop or rally was probably dead
ahead. He began to meticulously keep a "dope book" of his observations
and his real-time predictions based on them, and noticed that more often than
not the markets proved him right.

Soon Livermore was blessed with the opportunity to actually trade for himself
rather than just watch others trade. He amassed his first $1000 by the time
he was only 15 years old, much to his mother's amazement.

Now $1000 today isn't much, chump change thanks to 90 years of relentless
inflation by the nefarious Federal Reserve,
but $1000 way back in the pre-Fed days is the equivalent of about $20,000 in
today's inflation-eroded US dollars. Winning the equivalent of $20k in the
stock markets at the tender age of 15 would be a monumental achievement today
too!

Before he turned 21, an age today when most kids have horrendous finances
and mountains of college debt, Livermore's speculative capital had ballooned
to $10k, about $200k in purchasing power in today's dollars!

Speculation is a hard and unforgiving business and Jesse Livermore wasn't
King Midas, everything he touched did not turn into gold. He did suffer through
trying losing streaks like all speculators, even going completely broke several
times and deep into debt at least once. Yet, he eventually succeeded in mastering
the game to a magnificent degree and ultimately achieved a fantastic level
of success in the financial markets.

Livermore's exploits were recorded in the greatest book on speculation of
all time. Originally published in 1923, it is called "Reminiscences of
a Stock Operator" and was written by a gifted financial journalist named
Edwin Lefevre. Lefevre penned the account as if from the first-person perspective
of a fictional trader named Larry Livingston. As Lefevre had spent weeks extensively
interviewing Jesse Livermore, market historians are virtually unanimous in
viewing Lefevre's classic book as a thinly-disguised biography of Livermore's
trading life.

Today "Reminiscences of a Stock Operator" is fondly read with awe
by speculators of all levels and abilities all around the globe. I have personally
read the book many times and I try to re-read it at least once a year now.
The speculation wisdom contained within these magical pages is just awesome
and truly priceless for all speculators to digest.

If you are interested in speculation and you haven't read the book you owe
it to yourself to buy it today at Amazon or Barnes & Noble.
I can almost guarantee it will forever change you as a speculator and help
you soar to new heights of understanding of the game and achieving real-world
success.

Jesse Livermore's words and experiences are so endearing and powerful because
he presents himself as just another mere mortal like you and I, with hopes,
fears, and frailties. He is brutally honest in critiquing his own evolution
as a speculator and thoroughly explaining his own mistakes and the great wisdom
they ultimately led to.

Any speculator on Earth today, regardless of if they are interested in QQQ
options, futures, gold stocks, or
any other financial-market arena, can harvest vast wisdom from the endlessly
fascinating life of Mr. Livermore. Other than reading the Bible to understand
how unfathomably dangerous the emotion of greed is (1 Timothy 6:10 ...
For the love of money is the root of all evil...), there is
no book on speculating I can recommend more highly than "Reminiscences".

As my own lifelong personal evolution as a speculator continues and I attempt
to continually learn to deepen my own wisdom and understanding, I would like
to write some essays highlighting Jesse Livermore's awesome wisdom. Periodically
we will publish a new essay delving deeper into the book. I am not sure how
many essays it will ultimately take to hit the majority of the wisdom high
points in "Reminiscences", but the journey will be fun and enlightening.

My personal goal for embarking upon this "Wisdom of Jesse Livermore" series
is two-pronged. First, I want to deeply internalize Livermore's fantastic wisdom
myself so I can continue to grow as a speculator and also recommend superior
real-world trades for the wonderful subscribers to our acclaimed Zeal Intelligence monthly newsletter.

Second, I have a heart and passion for trying to help others grow into better
investors and speculators so it will be a great blessing to help share Livermore's
wisdom with a generation that desperately needs it. As we sojourn in a brutal
post-bubble bust era, it is more important
now than ever that investors and speculators today learn from legends like
Livermore so they can avoid making the same painful mistakes with their own
precious capital.

To make it easier for everyone to follow along, I will present Jesse Livermore's
wisdom chronologically from the book. All the bold-faced passages below are
his words directly out of Lefevre's book, while the following normal text is
my own feeble thoughts and commentary attempting to pull Livermore's wisdom
a century into the future to today. Before every quote below, the chapter in "Reminiscences" it
is pulled from is noted so you can quickly find it and dig deeper by reading
the valuable surrounding background context if you wish.

I hope and pray that you find Jesse Livermore's awesome wisdom as exciting
and valuable as I have!

(Chapter I) … "Another lesson I learned early is that there
is nothing new in Wall Street. There can't be because speculation is as old
as the hills. Whatever happens in the stock market to-day has happened before
and will happen again. I've never forgotten that."

Oh, what a priceless opening lesson! It reminds me of ancient Israeli King
Solomon's unequaled wisdom stating that "there is no new thing under the
sun." In the last few years literally trillions of dollars have vaporized,
shattering countless families' precious hopes and dreams, because investors
foolishly believed the silly new-era hype surrounding the doomed NASDAQ tech-stock
bubble.

Booms, bubbles, bursts, and busts have been around for centuries and will
continue into the future. Every major stock-market bubble is heralded as a "New
Era" at the time before it bursts. Everything investors and speculators
are witnessing in today's markets has come to pass before. Even though technology
relentlessly marches forward, there is one ultimate driving force behind the
endless financial-market machinations that never changes.

This force is the human heart. Every speculator is both blessed and burdened
with one. As long as humans trade, the titanic warring emotions of greed and
fear will lead to endless waves of overvalued then undervalued markets, booms
then busts, rallies then downlegs. A greedy or fearful trader today behaves
no differently than a greedy or fearful trader 100 years ago or 100 years from
now in the future. There is nothing new in Wall Street.

(Chapter I) … "That's all the fun there is - being right by
using your head. If I was right when I tested my convictions with ten shares
I would be ten times more right if I traded in a hundred shares. That is
all that having more margin meant to me - I was right more emphatically.
More courage? No! No difference! If all I have is ten dollars and I risk
it, I am much braver than when I risk a million, if I have another million
salted away."

Amen on being right! This is truly the greatest reward of speculating! The
huge profits are merely a pleasant byproduct. The real pleasure for speculators
involves being right and being rewarded for being right!

Being in the private speculation, financial newsletter, and consulting businesses,
I am really blessed to talk with all kinds of speculators around the world
on a daily basis. One common opinion I note in many of the speculators newer
to the game, and a myth I myself believed when I was younger, is that the size
of one's capital matters for success in speculation. In truth, size is irrelevant
in the vast, vast majority of speculation!

If you are a new trader and all you have is $1000 to risk, don't worry about
it at all. If you are right and your trades are blessed with success, your
stake, or "line" as Jesse Livermore called it, will grow. You have
to cut your teeth and learn the art of speculation by beginning small, and
only then can you eventually grow to become an elite speculator some day.

If you are faithful over a few things, successfully trading whatever meager
capital you can scrape up initially, you will eventually be blessed with the
opportunity to be a ruler over many things. If you sow the seeds of learning
how to speculate starting small, you will eventually reap the magnificent harvests
of speculating big with awesome amounts of capital.

Success in speculation is not related to one's bankroll and a very small speculator
takes the same risks and plays the game the same way as a large speculator.
If you want to be a speculator, please don't let your lack of capital intimidate
you. Livermore himself went broke and started again from nothing several times,
yet he still became so successful that he will be forever remembered as one
of the greatest speculators in all of history. Everyone starts small.

(Chapter I) … "I knew something was wrong somewhere, but I couldn't
spot it exactly. But if something was coming and I didn't know where from,
I couldn't be on my guard against it. That being the case I'd better be out
of the market."

Another common and deadly speculation myth is that speculators must always
be in the markets playing the game. As Jesse Livermore wisely pointed out,
this is foolishness. Once again the ancient King Solomon's vast wisdom echoes
through the ages, "To every thing there is a season, and a time to every
purpose under the heaven." There are times to trade and times not to trade.

Mr. Livermore noted that he had an uncomfortable feeling about the market
in this quote but didn't quite know why. Something in his subconscious was
nagging at him but he couldn't quite verbalize the thought. He wisely closed
his position and evacuated. As a speculator it is always far better to be safe
on the outside wishing one was in than being trapped on the inside hemorrhaging
capital at frightening speeds and wishing one was out!

Speculation opportunities are legion and will always exist. Like missing a
flight at an airport, it is never a big deal if you miss a particular speculation
opportunity because there is always another one flying out somewhere behind
it. In my own experience I have generally found that excellent speculation
opportunities arise every few months or so.

If something just doesn't feel right and you are uncomfortable with the markets
for some reason, get out and don't trade until your comfort returns. Worst
case you will have to wait a few months or so for the next prime opportunity.
Best case, however, you will avoid overtrading and finding yourself being flayed
alive by a big loss during anomalous market conditions.

(Chapter II) … "My plan of trading was sound enough and won
oftener than it lost. If I had stuck to it I'd have been right perhaps as
often as seven out of ten times. In fact, I always made money when I was
sure I was right before I began. What beat me was not having brains enough
to stick to my own game - that is, to play the market only when I was satisfied
that precedents favored my play. There is a time for all things, but I didn't
know it."

This hugely important lesson ties in with the one above. Periodically the
scales of probability tilt so favorably that a speculator commands high odds
of emerging from a specific trade with outstanding profits. As Jesse Livermore
learned, a prudent speculator will patiently bide his or her time to stalk
a trade. They won't actually commit a dime of capital until they are sure that
market precedents favor the speculation they are about to embark upon. In Zeal Intelligence we christen
these super-opportunities "The Big Trades".

After Livermore found a speculation that had a high probability of success
based on past market behavior, he learned the hard way that he should stick
with his position. If he knew he "was right" going into a trade,
he said he always won. I have also experienced this in my own personal speculation
evolution. I have found that the times I really felt that a trade was "right" before
I began were vastly more successful than the times I foolishly succumbed to
temptation and traded on a flimsy whim. Planning is crucial and impulse trading
is lethal!

Speculators must research the markets, patiently await an awesome opportunity,
bravely deploy their capital ahead of the expected market move as contrarians,
and diligently ride it out towards the original end they anticipated. If they
fail to meticulously follow these 4 steps, research, stalking, deploying, and
sitting tight, odds are their speculations will not be very successful on balance.
Livermore knew his stuff!

(Chapter II) … "There is the plain fool, who does the wrong
thing at all times everywhere, but there is the Wall Street fool, who thinks
he must trade all the time. No man can always have adequate reasons for buying
or selling stocks daily - or sufficient knowledge to make his play an intelligent
play. I proved it."

Wow! This wisdom is sure controversial today! Jesse Livermore, one of the
greatest speculators of all time, flat-out says that day trading is foolish.
He points out that there are never "adequate reasons" to buy or sell
stocks constantly, and that someone who tries to play the game of trading all
the time is a "Wall Street fool". Interestingly, Wall Street loves
these suckers as their constant trading racks up enormous brokerage fees whether
the speculators win or lose in the end.

In my own evolution as a speculator, I tried the day-trading game in early
2000 as the tech bubble was topping. I was primarily trading biotech and genomics
stocks, entering and exiting single trades within hours or sometimes even minutes.
Thankfully I emerged unscathed as I was blessed with modest profits after a
couple months of this, but I will never forget the fantastic lessons I learned.

First, trading is stressful. The markets are a hard teacher. Every single
time you have an open trade with your precious capital exposed to the markets,
you burn some crucial psychological capital. Having open positions is always
an emotional burden, sometimes it is light and sometimes it feels like a mighty
lead anchor chained around your neck crushing you into powder. In day trading
the ultimate stress and psychological capital cost is immensely higher because
the volume of trades is so much higher. Today I prefer tactical speculations
with multi-month time horizons, as far fewer trades are necessary so they are
vastly less of an overall psychological burden.

Second, as Livermore wisely points out, there is no way to have "sufficient
knowledge" to consistently intelligently day trade. Especially in the
young Information Age today, speculators trying to absorb the torrents of financial
information available are essentially trying to drink from a raging fire hose.
If a speculator is buying or selling every couple hours every day, he or she
cannot possibly have studied each trade enough to fully understand its risks
and implications.

Third, the ultra-short-term intraday markets are inherently unpredictable
and capricious. Any speculator can make an educated guess about whether the
markets will be higher or lower a few months from now, but since information
flow and general sentiment can shift so incredibly rapidly no one has a clue
whether the markets will be up or down tomorrow. The shorter the expected time
horizon for a trade, the more it resembles pure Vegas-style gambling and the
less it is like intelligent speculation.

Fourth, a day trader is a slave to the computer. They must constantly be hunched
among computers painstakingly watching minute-to-minute market movements and
attempting to divine what on Earth will happen a half hour later. Day traders
are always exposed and can seldom take mental or physical breaks. In sharp
contrast, a tactical multi-month speculator can relax and enjoy life, virtually
ignoring the markets for weeks at a time, once their capital is deployed and
in position.

Finally, the typical profits in day trading are usually trivial. After commissions,
a day-trading scalper is lucky to earn a few percent on each trade on average.
Why face the monumental stress of day trading to earn a measly few percent
on your capital while risking much larger losses? Conversely, a multi-month
tactical speculation played out right can earn profits in the hundreds of percent,
such as our current open QQQ options plays outlined
in Zeal Intelligence now have the
potential to achieve.

Well, unfortunately this is all of Jesse Livermore's wisdom that fits into
this first essay in my new series on "Reminiscences". I hope you
found Livermore's great wisdom enlightening!

Go buy and read "Reminiscences
of a Stock Operator" today! I can almost guarantee it will forever
change your life as a speculator! Jesse Livermore's quotes are even more
impressive in proper context and are delightful to read and digest. This
essay format can't even start to do them justice.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to
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